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Entrepreneurship and the Global Economy

Guest post by: United Nations University

Article Overview: Entrepreneurs are the bedrock of the capitalist system, and their development has to be seen in the context of the development of societies that allow and even encourage private accumulation of capital for investment. Although traders are the foundation of a market economy, it is primarily the rise in broad-based manufacturing investment and the social division into owners and workers that distinguishes a pre-capitalist from a capitalist system.

Entrepreneurship and the Global Economy

Entrepreneurs are the bedrock of the capitalist system, and their development has to be seen in the context of the development of societies that allow and even encourage private accumulation of capital for investment. Although traders are the foundation of a market economy, it is primarily the rise in broad-based manufacturing investment and the social division into owners and workers that distinguishes a pre-capitalist from a capitalist system. This study will focus primarily on entrepreneurship in the "modern" manufacturing sector. It sees entrepreneurs as the founders and leaders of businesses, a group separate from business managers, but with many of the same concerns. Even with these limits, there are a number of dimensions of entrepreneurship that need to be understood in order to learn from comparisons. First, entrepreneurs need to be studied as individuals whose histories and capacities make up much of the dynamic force of an economy. Second, we need to understand the relations between entrepreneurs and the state: under what conditions do societies move from state-business relations characterized by patronage, cronyism, and corruption, to those characterized more by productivity, dynamism, and synergy? Third, we need to explore the linkages between and among entrepreneurs: their networks, clusters, and associations, and the ways in which these linkages are globalized.

Most of the studies of entrepreneurship in these two regions examine entrepreneurs as individuals, often including life (or firm) histories or an assessment of the capacity and "modernity" of a country or region's businesses. These studies have their roots in several traditions. Modernization theorists during the 1950s and 1960s studied the extent to which entrepreneurs in both regions possessed the attitudes and skills necessary for modern business development. Both academics and politicians expressed doubt over the ability of local entrepreneurs in both regions to provide the driving force for economic development. This set of concerns survives in recent studies that examine the relative capacity, productivity and efficiency of local firms and firms owned by foreigners, as well as those that address the debate over whether or not each region is developing a "true" indigenous capitalism, or some distorted "ersatz" or "comprador" varient, and those that examine entrepreneurship and ethnicity.


The relationship between entrepreneurs and the state entails another level of analysis, one that examines the collective development of entrepreneurs, not their individual growth. Several concerns arise here. An effective capitalist system requires a state that provides an "enabling environment" for business, but which is able to maintain some autonomy and avoid "capture" by the business class. Relationships that are too close degenerate into rent-seeking and "cronyism" or "pariah" capitalism, the kind found under Marcos in the Philippines or Abacha in Nigeria. Relationships that are too distant run the risk that the state will not see the promotion of business as an important goal, resulting in an overregulated or even hostile environment, such as that under Rawlings in the early 1980s in Ghana, or Indonesia under Sukarno. A developed business class (or capitalist class) has a self-consciousness that enables it to promote its interests. One of the puzzles in the study of entrepreneurs and the state remains: under what conditions does the business class see its interests being met by policies that promote capital accumulation through productivity increases and competition, rather than through protection and rent-seeking? Another puzzle focuses on the cohesiveness of the business class: when do divisive forces like ethnicity and nationality become less important than the interests broadly shared by entrepreneurs?

Finally, a critical area for research on entrepreneurship covers the relationships among entrepreneurs and firms: the links, networks and clusters that provide information, assistance and examples, stimulate innovation, and transfer technology and skills. Robert Wade noted that the relationships among firms and other aspects of firm organization should have a "central place" in any study of industrialization, admitting that his inability to say very much on this issue was "a major gap" in his 1990 study of East Asian industrialization. Peter Evans' work on embedded autonomy partially remedied this gap, with its close examination of the interlinkages between state and business in India, Korea, and Brazil. Yet even Evans' impressive book placed primary emphasis on government, and secondary emphasis on the ways in which government interacts with business. Businesses themselves, and the many-stranded networks that link businesses together, received scant attention.

Very recently, however, research has begun to tease out the implications of the multistranded relationships that comprise industrial clusters, and local and international business networks. These relationships may range from intricately linked business groups, with overlapping directorates and share ownership, to networks of information formed through trade or membership in business associations or social clubs. One set of studies proceeds from the idea that industrialization can be facilitated by Marshallian industrial districts which produce economies of agglomeration. Clusters of enterprises in similar or related industries can be found throughout Southeast Asia and Subsaharan Africa. Geographic propinquity may generate economic benefits for entrepreneurs, but this must be established, not assumed. Among the potential benefits are lower costs of production through joint marketing or joint purchase of inputs, or lower transaction costs through sharing information about market demand, reliable sources of technology and equipment, or supplies; equipment sharing; access to working capital; subcontracting opportunities; informal technical assistance, etc. Harvard Business School professor Michael Porter highlights these clusters as an important component of "competitive advantage", arguing that when industries are geographically concentrated, domestic rivalries are magnified, and rivalry is a potent force that goads entrepreneurs into keeping up with their neighbors.

Another set of researchers approach the question of linkages via a focus on economic organization. Organization theory and some branches of economics examine the institutional forces that shape entrepreneurs' strategic decisions about firm structure: vertically-integrated hierarchies, or looser, horizontally-linked enterprise groups (common in both Southeast Asia and Africa) and subcontracting arrangements for example. A current thread within this research examines the question of "trust" and "social capital" in comparative perspective. In more complex societies, trust is less necessary for exchange, since courts and other impersonal institutions of contract enforcement provide incentives to follow through on agreements. In less complex societies, familiarity, reputation and ascriptive characteristics such as shared ethnicity substitute for formal enforcement, smoothing transactions and allowing contracts to be upheld. It is possible that societies differ in the degree to which their history and shared sense of trust has created the kind of social capital that facilitates efficient exchange and investment.

The discussion above outlines most of the issues that concern us as we look comparatively at local entrepreneurship in Southeast Asia and Sub-saharan Africa. Each region has grappled with a set of challenges inherent in the transition from traditional (pre-capitalist) to "modern" capitalist systems. Technical and learning challenges provide one set: how do entrepreneurs gain access to the skills and machinery that will enable them to be internationally competitive? How do they break into international markets? But the political and social challenges of business development are equally vexing. Entrepreneurial opportunities in each region tend to be skewed toward certain ethnic groups (including Europeans). What are the development implications when the industrial dynamism in an economy comes primarily from foreign or non-indigenous local investment? Finally, the political influence of entrepreneurs and their relationship with the state shape the incentives business receives and the ways in which accumulation occurs. Ruth McVey once described a business promotion program in the Phillippines as "a giant porkbarrel into which politicians and their friends, newly dubbed entrepreneurs, dipped their fingers". Can a business class formed through rent-seeking and "crony" capitalism evolve over time in a more competitive and efficient direction or must it be largely destroyed through liberalization, so that something new can emerge?

By: Deborah Bräutigam
Local Entrepreneurship in Southeast Asia and Subsaharan Africa: Networks and Linkages to the Global Economy
School of International Service
American University
Washington, DC

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Article Tags: 1950s, accumulation of capital, bedrock, business managers, business relations, capitalist system, cronyism, driving force, dynamic force, dynamism, economic developmen, linkages, local entrepreneurs, manufacturing sector, market economy, modernity, modernization, patronage, state business, theorists



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